Roger Coffin, associate director of the Weinberg Center for Corporate Governance, argues the D.C. Circuit Court’s recent decision to vacate SEC Rule 14a-11
requires a rethinking of the APA and its intersection with the requirements of the law adopted by Congress in 1995 requiring enhanced cost/benefit analyses. A better approach, and one the SEC should argue on appeal, is for courts to adopt a standard of review similar to that undertaken in business cases, when the actions of a board of directors has been challenged. In such circumstances, many courts determine whether there was a process in place for decision-making, and whether such process was followed in good faith, without conflict of interest and in accordance with law. If met, the court defers to the actions of the board, careful not to disturb the business judgment of American corporations. Under the business judgment rule, courts will not second-guess corporate decisions, awards of compensation, or other actions taken in lawful due course and corporate purpose.
Independent agencies should be afforded a similar level of “agency judgment” protection. If, for the purposes of an APA review, an agency can demonstrate a process whereby costs and benefits are considered, and a good faith adherence to that process is free of conflicts or illegalities, the court should defer to the expertise of the agency. This is a preferred approach whether one believes the SEC should adopt a uniform rule on proxy access or not. The stakes are bigger than the right of large shareholders to access the corporate proxy. They implicate the ability of agencies to do what they have been tasked to do, within the parameters of their jurisdiction and expertise. If we are going to have bodies like the SEC, they should be allowed to function as intended. That the SEC was not given appropriate deference in the proxy access case is bad news for them, and for all agencies.
In California all regulations are reviewed by the Office of Administrative Law for compliance with our version of the APA. OAL reviews the rulemaking record to determine whether the rulemaking agency satisfied the procedural requirements of the APA and to review the proposed regulations for compliance with the six legal standards set forth in the APA: Authority, Reference, Consistency, Clarity, Nonduplication and Necessity. OAL may not substitute its judgment for that of the rulemaking agency with regard to the substantive content of the regulations. See Government Code section 11349.1.
Though not binding on the courts, OAL findings are entitled to deference. (Grier v. Kizer (1990) 219 Cal.App.3d 422, 435, disapproved on another ground by Tidewater Marine Western, Inc. v. Bradshaw (1996) 14 Cal.4th 557, 577.) Too bad the SEC isn’t under California’s jurisdiction.